Pre Budget Memorandum

PREAMBLE

Auto industry is said to be the engine of growth in most developed countries, including in China and India today. Indian automobile industry which was at its nascent stage at the beginning of the 21st century has now become a huge industry that contributes majorly to growth and development of Indian Economy. As per the current statistics, the auto industry’s turnover is estimated to be equivalent to:

7.1% of overall GDP

About 26% of Industry GDP

About 49% of manufacturing GDP

The industry employs 29 million people, directly and indirectly, and contributes to 13% of excise revenue for the Government.

The Automotive Mission Plan 2006-16, a joint document of the Government and industry has projected that the industry’s turnover would increase from US$ 34 billion to US$ 145 billion, an investment of US$ 35-40 billion (Rs.160,000 -180,000 crores) and 25 million additional job would be created over a period of 10 years. The auto industry’s contribution to GDP would rise from nearly 5% to 10%, thus making it a greater driving force of the economy.

As envisaged, the industry has made major investments to achieve the targets set. The industry has made investments to the tune of Rs 50,000 crores in the last three financial years. However at the current level of growth, the industry is expected to be just over US$110 billion, a shortfall of about 25%.

The industry was growing at the right pace until financial year 2012 to achieve the targets set in AMP 2016. However, the industry witnessed two difficult years, FY13 and FY14, in which the segments across the industry witnessed de-growth, carrying nearly 60% surplus production capacity.

The current change in policy environment and consumer sentiments have brought the industry out from the bottoms seen during the last two financial years. The Government recognized the fact that automobile industry was one of the highest taxed industry in India and the high taxes were acting as a deterrent for growth of the industry. Hence, in the Interim Budget 2014-15 excise duties on all products across various segments within automobile industry were reduced.

The changes to the excise duties were as below:

Excise duty on small cars, commercial vehicles, two wheelers and three wheelers was reduced from 12% to 8%

Excise duty on (other passenger vehicles) of engine capacity not exceeding 1500 cc was reduced from 24% to 20%

Excise duty on SUVs/UVs of engine capacity exceeding 1500 cc was reduced from 30% to 24%

This reduced duty structure regime was further extended until December 2014 in June 2014, before the General Budget 2014-15 was announced in July 2014. Even after the reduced duties on automobiles, the industry is highly taxed. For every Rs 100 that the four-wheeler auto industry (other than small cars) collects from the consumer, the Government collects approximately Rs 81 from the consumer in the form of various taxes such as excise duty, sales tax, road tax and service tax. While for every Rs 100 that the four-wheeler auto industry (small cars) collects from the consumer, the Government collects approximately Rs 58 from the consumer in the form of various taxes. Taxes are levied on fuels as well.

The auto industry currently employs more than 29 million people both directly and indirectly. The auto-industry is a key employment generator in the OEM factory that manufactures the vehicles, in the inbound auto component and logistics industry that makes and delivers components & systems and the outbound logistics and dealer network that sells, maintains and distributes the cars. Every vehicle produced, generates secondary and tertiary employment. The industry generates employment of 13 persons for each truck, 6 persons for each car and four persons for each three wheeler and one person for two-wheelers. It is important to appreciate the sector’s multiplier effect on economic activity. If the industry produces as per its potential, it could generate employment of over 35 million people by 2016.

If the Government’s objective is to increase the share of manufacturing in the GDP of the economy from an estimated 15 per cent to at least 25 per cent so that employment gets a definite boost, the role of auto industry cannot be ignored and the industry has already made investments to achieve this objective and have increased the capacity to levels that would be needed to achieve the objective.

The industry requires the Government to support by providing it an atmosphere that facilitates growth. While the auto industry is focused on generating volumes in the different segments to garner growth, it is in the interest of the Government to continue with the lower excise rates as this will help increase volumes and garner additional tax revenue. High tax rates and consequent high prices of vehicles have a harmful effect of lowering volumes, lowering gross tax collections and ultimately lowering growth in the auto sector.

The Government should facilitate a conducive environment for growth of auto industry by defining favourable long-term policy for investment. Due to the unfavourable policy environment in the country where tax rates on vehicles are getting changed every year and Government is negotiating FTAs where custom duties are likely to come down, many international companies that had plans to enter the market have stalled the plan and are now considering other emerging markets, such as China and Brazil.

The automobile industry in India is one of the most successful story of post liberalization manufacturing space in India and entirely based on prudent policy support of the Government. Major inhibitors to growth of the automobile industry are as below:

Duty drawback rates that were already low and not compensating for the duty being paid, decreased further to enhance the worries of the industry

No certainty over exclusion of automobiles in the FTAs/PTAs being negotiated to protect existing investment or to encourage future investment.

Low growth of Export markets

The production growth in various segments over last few years is as follows

Segment

2010-11

2011-12

2012-13

2013-14

2014-15 (Apr-Sep)

Passenger Vehicles

2,982,772

3,146,069

3,233,561

3,072,651

1,584,201

Commercial Vehicles

760,735

929,136

831,744

698,864

338,909

Three Wheelers

799,553

879,289

839,742

830,120

478,733

Two Wheelers

13,349,349

15,427,532

15,721,180

16,879,891

9,429,850

Grand Total

17,892,409

20,382,026

20,626,227

21,481,526

11,831,693

Our Exports performance over last few years is as follows

Segment

2010-11

2011-12

2012-13

2013-14

2014-15 (Apr-Sep)

Passenger Vehicles

444,326

508,783

554,686

593,507

307,473

Commercial Vehicles

74,043

92,258

79,944

77,056

41,253

Three Wheelers

269,968

361,753

303,088

353,392

200,514

Two Wheelers

1,531,619

1,975,111

1,960,941

2,083,938

1,277,591

Grand Total

2,319,956

2,937,905

2,898,659

3,107,893

1,826,831

The industry has potential to grow to become a major economic contributor. The Government also recognizes the importance the automobile industry holds in the Indian economy and hence is currently working on Automotive Mission Plan 2026 to set targets for the industry for the year 2026 and to suggest interventions that would be critical for growth of the industry. The industries identified by Prime Minister for “Make in India” also include the automobile and auto component industry.

Moreover, India is still highly under penetrated. In India, there are only 18 passenger vehicles per’000 population, 5 commercial vehicles per’000 population and 91 two wheelers per’000 population. Globally, these figures are substantially higher. For instance, Germany has an estimated 518 cars per’000 population, Japan has 457 cars per’000 population and Thailand 68 cars per’000 population. In case of Commercial vehicles, the penetration in various countries is much higher – 388 in the USA, 121 in Japan, 86 in Thailand, etc. In two wheelers also, countries like Thailand (248), Indonesia (216), Japan (98), Germany (72), etc have much higher penetration.

Recent Performance

Production

The industry produced a total 2,227,140 vehicles including passenger vehicles, commercial vehicles, three wheelers and two wheelers in September 2014 as against 1,818,753 in September 2013, registering a growth of 22.45 percent over the same month last year. Double digit growth driven by two wheelers only.

Domestic Sales

The sales of Passenger Vehicles grew by 4.25 percent in April-September 2014 over the same period last year. Within the Passenger Vehicles segment, Passenger Cars and Utility Vehicles grew by 4.09 percent and 12.17 percent respectively, while Vans declined by (-) 13.35 percent in April-September 2014 over the same period last year.

Three Wheelers sales grew by 17.80 percent in April-September 2014 over the same period last year. Passenger Carriers and Goods Carriers grew by 19.40 percent and 10.49 percent respectively in April-September 2014 over April-September 2013.

Two Wheelers sales registered growth of 16.41 percent in April-September 2014 over April-September 2013. Within the Two Wheelers segment, Scooters, Motorcycles and Mopeds grew by 32.11 percent, 11.65 percent and 10.21 percent respectively in April-September 2014 over April-September 2013.

Exports

In April-September 2014, overall automobile exports grew by 19.99 percent over the same period last year. Commercial Vehicles, Three Wheelers and Two Wheelers grew by 15.55 percent, 13.27 percent, 27.84 percent respectively while passenger vehicles declined marginally by (-) 0.93 percent during April-September 2014 over the same period last year.

Summary of Key Suggestions

SIAM’s Memorandum of Suggestions is prepared in light of these developments and we hope that suggestions put forth will be considered favourably and action taken expeditiously to assist the auto industry to grow in a sustainable manner.

Excise Duty Rates for Components and Parts falling under Chapter 8707, 8708, 8714 and 4011 should be reduced to avoid CENVAT credit accumulation at the OEMs.

Excise Duty & Custom Duty Concessions on Identified parts of Hybrid/ EVs parts should be extended to all parts used in manufacture of electric vehicles and the extension should be extended for a longer period instead of till March 2015.

Address the financial difficulty caused by differential excise duty on component and vehicle which is affecting the companies with manufacturing units in tax free zones of hilly states.

Introduce GST across all states and share the draft modalities & procedures now. Industry needs minimum 3 months for smooth transition. Taxation of Used vehicles should be covered as well as all taxes including road tax should be subsumed in GST.

1% NCCD on Vehicles should be withdrawn. Until the time NCCD is not withdrawn, Payment of NCCD from CENVAT should be allowed (finalize the draft circular issued in September 2012)

4% SAD should be abolished

2% CST to be reduced to 1% as was proposed by Government when the announcement for implementation of GST was made.

Legislative amendment required to Central Excise Act - Excise duty should not be applicable on Sales Tax/VAT benefit given by state government (Supreme Court judgment in case of Super Synotex and Maruti Suzuki)

Excise duty rate for chassis of ambulance should be reduced

Excise duty on chassis of refrigerated motor vehicle needs to be reduced

Incentivize replacement of vehicles, which were registered before the year 2000 when the first emission norms were introduced in India.

Depreciation rate for Motor Cars, MUVs and 2 wheelers, other than those used in the business of Hire, irrespective of the period of addition should be raised to 25% from 15%

Deduction of interest paid on vehicle loans by an individual should be allowed for income tax calculation (like in case of Educational loan).

150% weighted deduction for expenditure incurred in skill development should be expanded to cover ITIs, Diploma Institutes and other institutes including manufacturers’ own training institutes, etc. from where the industry meets its skilled manpower requirement.

Key Suggestions

S.No.

Issue

SIAM Suggestion

Explanation

Excise duty on small cars, two wheelers, three wheelers and commercial vehicles

Concessional Excise Duty Structure/ Equivalent GST should be applicable on small cars, two wheelers, three wheelers and commercial vehicles until the time GST is introduced. The rate of CENVAT should continue to be 8% as was suggested in the Interim Budget 2014-15.

As per Automotive Mission Plan 2006-2016 (AMP), fiscal incentives, such as lower excise duty to below the central CENVAT rate should be considered for certain class of vehicles which included small cars, MUV, 2 & 3 Wheelers and Commercial vehicles. After excise duty cut announced in Interim budget 2014-15, most of the companies have passed on the excise duty cuts to the customers by lowering prices. The auto industry has just started recovering from the downturn and excise duty increase might further aggravate the situation.

2

Excise duty on passenger vehicles (other than small cars)

SIAM requests that the excise duty rate for passenger vehicles (other than small cars) should continue to remain at 20% and 24% until the time GST is introduced.

SIAM had requested for duty reduction on passenger vehicles (other than small cars) in its pre-budget memorandum as total taxes on these vehicles added upto 80%-90% on the total factory gate price of the vehicle. Although, the sales in auto industry has recovered slightly in past 3-4 months. Most of the companies continue to de-grow and are carrying surplus capacity. High taxation would largely affect sales in a price sensitive market like India.

We are thankful to Government for recognizing the need for moderate excise taxation on vehicles. However, while doing so, the excise duty on components and parts, used in the manufacturing of vehicles have been kept at the base rate of 12% except for components falling under Ch 84 and 85. This has resulted in a differential excise duty structure which puts the industry in a further financial strain as the entire duty paid on the inputs cannot be adjusted against the output tax liability. Therefore, it is suggested that excise duty on components and parts falling under chapter 8707, 8708, 8714 and 4011 be reduced.

4

Differential excise duty on inputs and output causing financial loss to auto companies that have made investment in Hilly states

Address the concern of these select companies appropriately to compensate for the loss in Cenvat due to differential excise duty since the investment made is yet to be recovered

Many automotive manufacturers have set up facilities in the hill states of Uttarakhand and Himachal Pradesh. For these manufacturers, reduction in excise duty on the finished vehicles without corresponding reduction in excise duty on components has resulted in erosion of tax benefits envisaged for investments in these states. There is a cash loss for these companies which has significantly damaged its operational viability in these locations.

The excise and custom duty concession on hybrid and electric vehicles parts needs to be extended for a longer period of time to promote xEV mobility (at least for a period of 5 years). It is also suggested that excise & customs duty exemption should be extended to all parts used in Electric Vehicles, which are procured locally or imported.

Presently the benefit is available only to select parts, viz. Battery, AC/DC Motor & Motor Controller, which is resulting in additional cenvat credit, which cannot be utilized. This will also promote use of electric vehicles, in preference to vehicles using fossil fuels and save precious foreign exchange.

6

Encouragement for development of Hybrid-Electric Vehicles and Electric Vehicles

Proposed scheme under the NMEM is eagerly awaited
Industry suggests that pilot projects on e-mobility should be implemented in consultation with stakeholders
Funds may be earmarked for the same.

These multiple levies should be merged into a single rate of Excise Duty

Multiple levies distort the system. a manufacturer has to maintain separate accounts. Single rate would be helpful in aligning with proposed GST

8

Withdrawal of National Calamity Contingent Duty (NCCD)

We fully agree with method to put this levy on some selected products like cigarettes or tobacco, which are to be discouraged on health grounds. However including products like Motor-cars/MUVs/ Two wheelers in category of products to be discouraged like cigarettes is not at all fair and equitable. We sincerely request you to abolish this NCCD on above automobiles and support Auto Industry in this difficult time. Till such time NCCD is abolished, we request CENVAT be allowed for payment of NCCD on automobiles. Board has even issued a draft circular no. F.No. 354/135/2012-TRU in Sep.2012 clarifying NCCD can be paid through cenvat credit of Basic Excise duty. It is requested that a final circular be issued in this regard so that pending litigation can be closed.

NCCD was first imposed in Budget 2001-02 on Cigarettes, pan masala, biris and other tobacco products.At the time of its introduction in 2001-02, it was mentioned that this tax is being levied on some products, which are to be discouraged on health grounds.

In Budget 2003-04, NCCD levy was imposed on Polyester filament yarn, motor cars, multi-utility vehicles, two wheelers, domestic crude oil for one year up to 29.02.2004. In the Interim Budget for 2004-05 this levy was extended up to 31.03.2005.

In the Budget 2005-06, this levy was extended without any time limit.

In the budget 2008-09, this levy was withdrawn on polyester and extended to mobile phones.

To abolish SAD and provide a level playing field as input tax rate would be equal to output tax rate and credit would be exhausted even in case of lesser value addition. In the event SAD is not abolished either A refund mechanism needs to be established as prevalent in states in respect of VAT where, unutilized VAT Credit is refunded after assessment. or Reduce the SAD rate to 2% and maintain parity with the CST rate.

The Additional duty under sub-section (5) of section 3 of the Customs Tariff Act (SAD) was introduced in lieu of VAT when the CST rate was prevailing at 4%. However, the rate of CST has been constantly been reduced over the years and currently stands at 2%. The assesses who import the goods for manufacture, cenvat credit availed would be to the extent of 12% CVD + 4% SAD resulting in a credit of 16%. However, the assesses would be able to utilize the credit in full only where value addition is more than 34%, in the event of output liability being 12%. Further, The Rule 10A was inserted vide Notification 18/2012 CE-NT dated 17.03.2012 which provides for transfer of Transfer of CENVAT credit of additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act (SAD) - from unit of the assessee to their another unit and this facility is not available to assesses who are having single unit. Issue: The benefit of the above rule accrues only to assesses who are having more than one unit where Cenvat Credit of SAD can be effectively utilized and not to a single unit who are saddled with more credit of SAD due to higher import content and lesser value addition in their operations resulting in accumulation of unutilized SAD Credit. Smaller companies are put to undue hardship due to the accumulation of SAD.

10

Central Sales Tax

In view of the fact that GST is likely to introduced in F-17, the Central Sales Tax should be reduced from 2% to 1% in F-16

When announcement for implementation of GST was made, the government had proposed to reduce the concessional rate of CST by 1% every year to bring it down to nil. However, after June’08 there has been no reduction in the CST rate which is prevailing at 2% since then.

11

Excise Duty on Sales Tax/ VAT Benefit given by State Governments

It is suggested that suitable legislative amendments be made to solve problem relating to State Government incentives. Substance of amendment can be following:-The amount of sales tax collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, be considered as equivalent to sales tax actually paid under the excise law and thus should not be added to the assessable value of goods for excise duty calculation. This should be made effective from date of amendment.

The Hon’ble Supreme Court in the case of Super Synotex (India) Ltd. has held that under the present provisions of Section 4 of the Central Excise Act which came into effect from 01.07.2000, a part of the sales tax amount collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, should be added to the assessable value of the product for the payment of excise duty.

A similar judgment has also been subsequently delivered by the Hon’ble Supreme Court in case of CCE v Maruti Suzuki India Limited (Civil appeal No.5183 of 2004)

Thus, till the pronouncement of the above judgments by Hon’ble Supreme Court, the understanding prevailing in the government as clarified by way of CBEC circulars & industry was that a part of the sales tax amount collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, by way of deferment or otherwise, should not be added to the assessable value of the product for the payment of excise duty.

Various manufacturers across the country and operating in different business segments are facing serious problems in light of this judgment of the Hon’ble Supreme Court in as much as the excise department is asking them to pay excise duty and interest on the sales tax incentive amounts granted to them by various State Governments.

A detailed note on the following is provided in the Annexure 3

12

ED rate for chassis for ambulances

Basic excise duty rate on chassis for ambulance should be realigned with excise duty rate for fully fitted ambulance and both should be brought at part i.e. 8% so that accumulation of Cenvat credit can be avoided.

Factory fitted ambulances falling under Chapter Heading Nos. 87.02 or 87.03 attract basic excise duty @ 8% (Refer Sr. No. 347 of Notification No. 2/2014-CE dated 11.07.2014). Chassis for such ambulances fall under Chapter Heading No. 8703.00.39 attracting basic excise duty @ 24%. Thus, when the chassis manufacturer sends ambulance chassis for ambulance body building basic excise duty @ 24% is required to be paid which is available by way of Cenvat credit to body builder. However, at the time of clearance of fully fitted ambulance from body builders’ premises, excise duty @ 8% is attracted because it is fully finished ambulance. The disparity between excise duty rate on chassis for ambulance and fully fitted ambulance results into accumulation of Cenvat credit at body builders’ end.

Fully Built Refrigerated Motor Vehicles attract 6% ED whereas Chassis for such Vehicles suffer Excise Duty @ 9% (earlier 13%). In most of the cases, the bodies on such vehicles are built in independent body builders. This results in huge accumulation at body builders’ location.

Tariffs for CBUs of commercial vehicles should be de-linked from other tariffs. The applied rates for vehicles need to be pegged to 40% i.e. the WTO Bound Rate. This is in line with the customs duty in ASEAN region. Customs duty in Thailand: 40-60%, Indonesia: 40%. Even in US Basic Customs duty on most of the trucks is 25% and same in EU is 22%. There is no reason why the duty in India should be less than the same in EU or US. Moreover, because of our lower duty our negotiating position in India EU or other FTA discussions become weak.

13b

CBU of Passenger Cars/ MUVs under Tariff Heading - 87.03

60/100

125

60/100

125

Status-quo should be maintained. SIAM has always supported domestic manufacturing and local value addition & employment, and therefore has been requesting Government to keep duty on CBUs high. Moreover, huge subsidies are being given to the vehicle industry in other countries, which are giving vehicle manufacturers in those countries tremendous cost advantage over our products.

13c

CBU of Two-Wheelers under Tariff Heading - 87.11

60/75

125

60/75

125

Status-quo should be maintained. This is in line with SIAM position as given above.

S.No.

Issue

SIAM Suggestion

Explanation

Incentivizing Replacement of Old Vehicles

The Government should incentivise replacement of vehicles, which were registered before the year 2000 when the first emission norms were introduced. This would cover a total of 45 million vehicles (5 million cars, 3 million commercial vehicles and 31 million two wheelers) i.e. 40% of the vehicle population. The incentives could be in the form of rebate in Cenvat both at centre and state level. No road tax, subsidized finance like what happened in Delhi for Public Transport Vehicles.

Today, the total vehicle population in India is 109 million out of which 80 million are two wheelers, 6 million are commercial vehicles, and almost 15 million are passenger cars. Such a scheme would not only spur demand but will also considerably reduce the pollution in the country as nearly 80% of pollution is caused by vehicles more than 10 years old. Several other countries most notably Spain and Italy have used this successfully to spur demand of automobiles in their respective countries. China has also carried out such an exercise. Recently Govt of Germany announced a Euro 2 bn package for replacement of old vehicles, which has also successfully stoked demand. Detailed project concept paper being given separately. A detailed note on fleet modernization is provided in Appendix 2.

Depreciation Rate

Depreciation rate for Motor Cars, MUVs and 2 wheelers, other than those used in the business of Hire, irrespective of the period of addition should be raised to 25% from 15%.

The Companies Act prescribes depreciation @25.89% (implying useful life of 10 years) which should be charged in books of accounts of Company. Also, for instance, 15% WDV rate means useful life of 18-19 years for a car, which is totally unrealistic. Income tax should be levied on real income. Depreciation should be based on real useful life of cars, MUVs and 2 wheelers which is on average not more than 10 years.
Also, this would be a step towards incentivising modernisation of vehicle fleet, which is one of the policy interventions suggested in the Automotive Mission Plan 2006-2016.
Hence, depreciation rate should be increased to 25%.

In case of people having proprietary concerns, the expenses are allowed and the taxation of the final income is done on slab basis applicable for an individual. To keep salaried people and people having proprietary concerns at par, it is suggested that the salaried people may be given Standard Deduction, as it existed earlier. Further allowing interest paid on car loans by salaried people may be allowed as deduction under Chapter VI A (like interest on Educational loan). This will, not only help the salaried class, but will also help to boost the automobile industry and also result in increased collection of indirect tax by the Government.

Currently Salaried people are the only category that is taxed at gross level (as per the tax slabs) of income, without any deduction for any expenses.

150% weighted deduction for expenditure incurred in skill development

We request that the coverage of the same should include ITIs, Diploma Institutes and other institutes including manufacturers’ own training institutes, etc. from where the industry meets its skilled manpower requirement.

In the Union Budget 2012-13, it was announced that weighted deduction at the rate of 150 per cent of expenditure incurred on skill development in manufacturing sector will be provided.

DIRECT TAX

Benefit of investment allowance should be allowed for new Plant and Machinery acquired and installed during the period beginning from 1st April, 2013 and ending on 31st March, 2017.

Benefit of Additional Depreciation should be allowed on Plant & Machinery put to use for less than 180 days

Provision for Non-deduction or non-payment of TDS on payments made to non-residents

Common Authority to assess the Transfer Prices under Customs Laws and Direct Tax Laws.

CENTRAL EXCISE DUTY

Removal of time limit for availment of Cenvat Credit for Inputs and Input Services

Definition of “Inputs” should be rephrased to include “in or in relation to manufacture”

Definition of `input’ under Rule 2 (k) of the Cenvat Credit Rules, 2004 should have an explicit clarification that exclusion is not applicable to chassis for motor vehicles.

Assessment under Rule 8 of the Central Excise Valuation Rules, 2000 should allow for use of earlier years’ cost data in a few cases

Recovery of duty in respect of demand confirmed against an assessee from another person should be applicable only in cases where the High court or the Supreme Court has rejected the appeal of the assessee.

Personal penalty provision should be removed from the statute or alternatively suitable departmental clarification should be issued

Offences under excise law should not be cognizable and non-bailable

Method of investigation used by excise officers time taking and cumbersome

Clarification required in definition of job worker for valuation under Rule 10A of the Central Excise Valuation Rules, 2000

CUSTOMS DUTY

CNG/LPG vehicles should also get special concessions like Hybrids vehicles.

SERVICE TAX

Service tax under reverse charge method should only be paid by the service provider, except when service provider is located out of India

Definition of input service should be reframed to provide credit of all services procured by assessee for which service charges are paid/payable by the assessee

CENVAT Credit Rules, 2004 [Sl.No.7 to Notification no.26/2012] needs to be amended to provide unconditional abatement of 75% in case of transport of goods by road by GTA.

Benefits of CENVAT needs to be extended in respect of service tax which is incurred on the services received by the principal manufacturer for this business by an outsourced partner.

Interest on delayed payment of service tax should be corresponding to interest applicable under Central Excise Act & Customs Act (which is 18%).

CENVAT credit of all services used in construction or setting up of factory / factory building should be allowed.

Recovery of duty in respect of service tax demand confirmed against an assessee from another person should be applicable only in cases where the High court or the Supreme Court has rejected the appeal of the assessee.

OTHERS

Stay of demand is granted by ITAT should be allowed beyond 365 days until the disposal of appeal in cases where delay is not attributable to assesse

Special TP Bench in the Income Tax Appellate Tribunals to hear TP related appeals.

The Deemed Transaction under Transfer Pricing need to be dropped, as payments towards services received are subjected to TDS on gross basis. In respect of import of goods the same need to be controlled by SVB of the Customs department and should not be again scrutinized by the Income Tax authorities.

Rationalisation of TDS rate needs to be done – one rate for all Nature of payment (excluding Salary and Foreign Payments)

Process of cutting and slitting of steel coils be also considered as amounting to “manufacture”.

Railway Siding”/containerized trains for transportation to be treated as infrastructure

Customs and Excise Benefits needs to be extended for procurement of Scientific and Technical Instruments, Apparatus, Equipments, etc by a Research Institution other than a hospital

Other Suggestions

I. DIRECT TAX

S.No.

Issue

SIAM Suggestion

Explanation

1.

Personal Income tax

Option 1:

Increase the basic exemption from Rs. 2.5 L to Rs. 3L to give relief to small tax payers

The exemption limit for medical expenditure should be revised from Rs. 15,000/- to Rs. 50,000/-

The exemption limit for transportation expenditure should be revised from Rs. 800/-pm to Rs. 3000/- pm.

OrOption 2:

Increase Basic Exemption limit from Rs. 2.5L to Rs.5L

Basic Exemption Limit was Rs.150,000/- in the FY 2008-09, It was increased as follows in the subsequent years

Financial year Basic Exemption ( Rs.)
2009-10 1,60,000
2011-12 1,80,000
2012-13 2,00,000 It was increased to Rs. 250,000/- in the last Budget applicable for the FY 2014-15. Any increase in basic exemption, the benefit to the tax payers is only 10% of the increase as it falls under 10% slab.

Medical Reimbursement is allowed to employees only to the extent of Rs.15,000/- This was fixed many years ago.

Transportation allowance paid by employer to employee is exempted to the extent of Rs.800/-p.m. Even this limit also fixed long time ago.

Issue:

Considering the steep increase of food prices happened over the last decade, the increase in exemption is comparatively lower.

Similarly there was an increase of around 50% in the Cooking Gas price.

Due to advancement in the medical field, the cost of medical expenditure has increased substantially.

With regard to Fuel prices, the Petrol price has gone up by 55% & Diesel price has gone up by 101.34%

2.

Deduction u/s 32AC

Keeping in view the intention of the Government to promote investment in Plant and machinery, benefit of investment allowance should be allowed if the new Plant and Machinery has been acquired and installed during the period beginning from 1st April, 2013 and ending on 31st March, 2017.

Finance Act, 2013 inserted section 32AC in the Act to provide that where an assessee, being a company, is engaged in the business of manufacture of an article or thing and invests a sum of more than Rs.100 crore in new assets (plant and machinery) during the period beginning from 1st April, 2013 and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16. In order to cover medium size investments in plant and machinery eligible for deduction, it is proposed in this budget that the deduction under section 32AC of the Act shall be allowed if the company on or after 1st April, 2014 acquired and installed plant and machinery of more than Rs.25 cr in a previous year. Thus the benefit of investment allowance @15% on investment in new Plant and Machinery has been proposed to be extended for 2 more years till 31.03.2017. As per the amended provision, benefit of investment allowance shall be available only if the new Plant and Machinery has been acquired and installed in the previous year. Suitable amendment shall be made regarding eligibility of deduction in cases where the new Plant and Machinery has been acquired during one previous year and installed in another previous year, within the period of 01-04-2014 to 31.03.2017.

3.

Additional Depreciation on P&M put to use for less than 180 days

Government introduced this provision to encourage investment. Therefore, it is advisable that full 20% additional depreciation to be allowed even where the asset is put to use for less than 180 days (i.e 10% in the year of put to use and the balance 10% in the immediately succeeding year)

50% of additional depreciation (50% of 20% i.e 10%) on P&M is allowed in case where the asset is put to use for less than 180 days. However, there is no clarity whether the balance 10% additional depreciation will be available in the next year or not. Lack of clarity in the provision will lead to prolonged litigations and appeals before different authorities including ITAT and High Courts.

4.

Non-deduction or non-payment of TDS on payments made to non-residents

Provision as made for non-deduction or non-payment of TDS on payments made to residents should also be extended in case of payment made to non-residents In case of non-deduction or non-payment of tax deducted at source.

In order to reduce the hardship, amendment has been made by Finance Act 2014 that in case of non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed.

5.

Transfer Pricing Assessment under Customs Laws and Direct Tax Laws.

The present budget has introduced the provisions to share the information collected by one arm with another. On the similar lines, it is suggested that the best results will be achieved if a common authority comprising of the officers from both, Customs and IT department and the experts on auditing the accounts is established to examine all transfer pricing cases.

This will bring the uniformity in adoption of the Transfer Prices under both laws.

The examination of transfer pricing of goods for the purpose of levy of customs duty is conducted by the Customs authorities and for income tax purpose by the IT authorities. Thus, there are two different arms of Government for assessing the Valuation.

The customs value on imported goods is determined mainly for the purposes of applying ad valorem rate of duties.

Whereas, Under the Transfer Pricing provisions contained under Income Tax Act, 1961, the Transactions with Associate Enterprises are scrutinized for checking whether the same are at Arm's Length.Since there are 2 different arms of the Government which are assessing the Transfer Prices there is a Gap in the valuations made by them. For e.g. Customs is behind increasing the Transfer Price for arriving at the Assessable Value on the other hand Transfer Pricing Officers under the Income Tax Laws are behind reducing the same for ariving at the Taxable Income. This leads to difference in valuations under both the laws.

II. CENTRAL EXCISE DUTY

S.No.

Issue

SIAM Suggestion

Explanation

1

CENVAT credit on Capital goods (“CG”)

Parity to be maintained with that of Inputs.

Entire credit may be allowed in the first year of purchase itself.

Move in line with introduction of GST

As per the existing rule 3 of CCR, credit on CG is availed 50% in the first year and balance in the subsequent years.

2

Definition of “Inputs” under CENVAT credit Rules, 2004 has been amended as below:

All goods used in the factory of the manufacturer to be considered as inputs.

Establishment of nexus with manufacture is mandatory.

The words “in or in relation to manufacture” has been omitted.

The scope of goods cleared extended beyond accessories provided their value is included in the final product.

Items included under definition of CG but used as part/ component in the manufacture of final product would qualify as inputs – 100% credit available.

The phrase “in or in relation to manufacture” can be restored in the definition for the benefit of trade and industry.

Our suggestion to allow credit & remove restriction of goods used for construction of building or a civil structure or a part thereof; or laying of foundation or making structures for support of capital goods because the cost of this leads cost of assets which is used for business purpose.

Restriction of CENVAT credit on inputs as the scope of the definition is narrowed and increase cost of goods.

Though chassis are classified under different Chapter sub-heading i.e. 87.06, to avoid any issues at a later date, an explicit clarification that exclusion is not applicable to chassis for motor vehicles is requested for future & past i.e. period starting from 01.04.2011.

Detailed submission made to the Ministry on this issue earlier, is attached as
Appendix 3.

4

Assessment under Rule 8 of the Central Excise Valuation Rules, 2000

It is suggested that the assessee may be allowed to use cost of production based on earlier years’ cost data atlaeast in cases where the goods transferred under this Rule are used by receiving unit in manufacturing of dutiable products for captive use on behalf of sending unit.

In case goods are used captively for further manufacture by other unit of the same assessee, value is determined under Rule 8 of the Central Excise Valuation Rules, 2000 on cost of production + 10% Since there is volatility in the costs (both of the raw material and the overheads), ascertaining the costs at the time of clearance is very difficult. Further, and in any event, the goods being used in the manufacture would be entitled to the Cenvat benefit and the issue would be revenue neutral.

5

Recovery of duty in respect of demand confirmed against an assessee from another person – Introduction of Sec. 11(2) to Central Excise Act, 1944 w.e.f. May 2013

The law may be modified to the effect that these provisions would be applicable only in cases where the High court or the Supreme Court, as the case may be, has rejected the appeal of the assessee and he has not paid tax dues within the specified time limit. Further, a clear guideline may also be issued to the field formation as regards the process to be followed in such cases.
Govt. should also prescribe the procedure to ensure that the tax more than the one due to Govt. from the assesse is not recovered from any other person/ persons under this provision. In case such excess amount is recovered, assesse should have option to get the refund from the Govt.
Detail procedure to make such recoveries and payment of the same to government treasury should be specified.

The proposed section 11(2) of CEA, 1944 empowers the Central Excise Officer to recover any dues payable from one assessee from another person who owes money to the former. In the event of failure to pay the amount, the latter would be considered as an assessee in default. Unless there is a clear guideline issued by the Govt., the authorities may issue notices to the banker of the assessee and seek to recover the monies, even before the legal recourse available to the assessee has been exhausted. This could severely hamper the business.

6

Personal Penalty

This provision should be removed from the statute or alternatively suitable departmental clarification should be issued. The employees in large Corporates are salaried employees and are professionals. Their jobs are transferable. However, issuance of personal penalty notices create unnecessary obstacles. The work is done for and on behalf of Corporates (assessees). Excise Department should deal with the Corporates and not with individual employees.

It is observed that Central Excise Department sometimes issues notices for personal penalty to junior and middle level officers of the Corporates under Rule 26 (earlier rule 209A). This type of notices is mostly issued wherever allegation or suppressions are leveled. Excise duty is an indirect tax like Sales Tax, etc. However, there is no such practice of this type of personal penalty under Sales Tax Law.

7

Offences under excise law made cognizable and non-bailable

In order to foster faith and trust in the industry it is high time for the government to make offences under indirect tax law non cognizable and bailable.

Tax laws are always civil law and tax liability is a civil liability. However, in Finance Act 2013, certain offences under Customs Act, Central Excise Act and Finance Act, 1994 were made cognizable and non-bailable. Ever since new provision has been introduced in every indirect tax investigation threat of arrest and prosecution are being used. Tax payer should not be treated as criminals and mistrust between government and industry is not a good sign for healthy economy.
The criminal provisions under tax statute are required for those offenders who are likely to run away and investigating agency will not able to track their whereabouts. Such types of offenders are very few and due to some black sheep it is not proper to penalize entire industry. Without criminal provision arrest can be made if department convince the trail court with proper evidence that the case is fit for criminal investigation and arrest of the said person is required.

8

Method of investigation

i) Department can visualize what all types of information they may need in future and issue a proper notification/circular specifying details of all transactions, data, etc. needed by them. It is much easier for the Corporates to modify their computer systems and file the information on regular basis say monthly, quarterly or yearly than preparing ad-hoc information for last 5 years. ii) It is suggested that excise officials should not be authorised to summon the information which is already available with them as a part of monthly returns or otherwise.

It is observed that Anti Evasion and Preventive Wing of Central Excise Department routinely issues formal summons under Section 14 to various officials of the Companies and make them sit in the excise offices for hours. They are asked to give information through hand-written statements, written in the presence of excise officers. It is also observed that most of the information collected by them in this manner is already available and collected by them either in earlier inquiries or through normal monthly returns. Department does not look into their old files and use this type of easy method for them. Same information can easily be given by computer generated statement and typewritten statement instead of hand-written statements, which is very inconvenient method.

9

Valuation under Rule 10A of the Central Excise Valuation Rules, 2000

The definition of job worker is creating ambiguity, in situations where some quantity of the raw material is supplied by the manufacturer and the balance quantity is procured by the job worker himself. It may be clarified that this provision will apply only in cases where the principal manufacturer supplies all the raw materials to the job worker and there is no sale of goods by the job worker to the principal manufacturer.

Rule 10A provides for determining assessable value on the basis of transaction value if the goods are manufactured by the job worker on behalf of the principal manufacturer and thereafter the same are sold in the market or returned to the principal manufacturer. In such cases, the valuation methodology to be adopted which is prescribed under Rule 10A is to the situation as if the principal manufacturer himself has dealt with the goods. The definition of the job worker is `a person engaged in the manufacture or production of goods on behalf of a principal manufacturer, from any inputs or goods supplied by the said principal manufacturer or by any other person authorized by him’.

III. CUSTOMS DUTY

S.No.

Issue

SIAM Suggestion

Explanation

1

Components/Inputs for CNG/LPG Vehicles

We would like to include CNG/LPG vehicles also for getting special concessions like Hybrids on the environment consideration.

CNG/LPG vehicles whether Bi-fuel or Monofuel have the following benefits:
a) CO2 emission reduction from CNG would be around 20% and for LPG around 10% (this is in line with the Hybrid benefits). b) Energy security: especially for CNG, we are able to use domestic resources and we could take pressure off the main stream petroleum resources like Gasoline and Diesel. Industry has already implemented BSIV. With this the Gas Vehicles will have to migrate to Gas Injection systems. The injection system parts are expensive and most of them are sourced from Europe/Japan. We have seen some movement in CNG/LPG offtake in last few years. With the increase in cost of Basic parts and hence the Vehicles, the trend could get hampered. To continue with this trend and improve further, Govt. should give incentives in this area.

IV. SERVICE TAX

S.No.

Issue

SIAM Suggestion

Explanation

1

Service tax under reverse charge method

The reverse charge is now applicable based on a number of combinations- that is- category of service, the legal status of service provider (i.e. individual, company, etc), whether credit has been availed by service provider or not (like rent-a-cab case) and percentage of service tax payable respectively by service provider and service recipient. Ascertaining service tax liability in such a way is a cumbersome exercise. It is suggested that the service tax be paid by the service provider only except when service provider is located out of India ( foreign service providers)

A number of services have been brought under ambit of reverse charge method. Tax should be actually paid by the person who is responsible for payment i.e. service provider. Government has already exempted small assessees through threshold limit of Rs.10 lakhs. Hence tax administration for remaining assessees should be practical for the Department. There is no logical justification to burden corporate assessees for tax compliance of others.

2

Definition of Input Service

It is suggested that rules should be reframed to allow: Credit of all services procured by assessee for which service charges are paid/payable by the assessee except those services for which assessee recovers amount from any other person in such a way that it is not part of assessable value of any taxable goods/services supplied.

Rule 2(l) Input service means any service:
(i)….
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal. Proving that each input service has been
used in or in relation to manufacture of final products and clearance of final products upto place of removal will create a lot of difficulties, especially from the field officers. Our experience in availment of Cenvat only reinforces this view.
Services excluded from definition of input service in 2011 budget- In the budget of 2011, various important services which are necessary for any manufacturing activity or rendering of taxable service have been excluded from the definition of input service. The services which have been excluded include services like setting up of a factory, etc. The auto industry has committed huge investments to meet the targets set down in AMP 2006-2016 of about USD 35-40 bn. Not allowing credit on setting up of factory will discourage investment in India.

3

Service Tax on Transport of goods by road by Goods Transport Agency

Service Tax on transport of goods by road by Goods Transport Agency has been exempt to the extent of 75%. However, the abatement is conditional that Cenvat credit on inputs, capital goods and input services, used for providing the taxable services, has not been taken under the provisions of Cenvat Credit Rules, 2004 [Sl.No.7 to Notification no.26/2012] At times it is difficult to prove the condition of non-availment of cenvat credit by the service provider, when the service tax is liable to be paid by the service recipient under the reverse charge method. The notification may be amended to provide unconditional abatement of 75% in case of transport of goods by road by GTA. Simultaneously, the GTA service should continue to be outside the purview of output taxable service as per Cenvat Credit Rules.

Infact under the service tax law prior to 01.07.2012 also, considering this difficulty, unconditional abatement of 75% was allowed vide letter D.O.F.No.334/1/2008-TRU dated 29.02.2008. Also the definition of “output service” under the Cenvat Credit Rules was amended to exclude goods transport service from its purview. This resulted that goods transport agency could not avail cenvat credit and thus ensuring unconditional abatement to the service recipient liable for paying service tax. This ensured no revenue loss to the Government. In the amended Cenvat Credit Rules also, a GTA cannot avail cenvat credit on motor vehicles purchased by it. Diesel, which is a key input for GTA, is also non-cenvatable. Thus, a GTA cannot avail credit of its major inputs or capital goods.

4

Cenvat credit on service tax

Since the valuations are now completely aligned to the sale price of the principal manufacturer, it would be appropriate to extend the benefit of the service tax credits which accrue to the principal manufacturer on the same basis as “Input service Distributor” mechanism, which exists in respect of the services received by the Corporate offices of the manufacturers. In other words “Input Service Distributor” mechanism service not be limited to two offices of same “legal entity” but extended to “Principal Manufacturer” who outsources his manufacturing operations to another person (“Outsourced manufacturer”). In such case the “principal manufacturer” should be allowed to transfer the cenvat to the “Outsourced Manufacturer” or he should be allowed to take the credit even if he is not a manufacturer.

The cenvat credit on service tax is allowed to the manufacturer or the service provider. In many cases, the principal manufacturer outsources the manufacturing activity to a job worker/ contract manufacturer (outsourced manufacturer). In such case, the job worker is required to pay duty on the price at which the goods are sold by the principal manufacturers (either under Rule 10 A of the Central Excise Valuation Rules, 2000 or under Section 4A – MRP based assessment). In such cases, while the valuations (viz. determination of assessable value) are based on the sale price of the principal manufacturer, the benefits of the Cenvat is not extended in respect of service tax which is incurred on the services received by the principal manufacturer for this business.
By allowing such cenvat to the “Outsourced manufacturer” the cascading effect of taxes, would be avoided. This is also in alignment with proposed scheme of GST.

The interest rate for any delayed payment of service tax should be corresponding to the rates of interest which are applicable under the Central Excise Act, 1944 & the Customs Act, 1962 (which is 18%)

The interest @ 18% p.a. itself is very steep and penal in nature. Apart from this, and in any event, for any delayed payment there are penal provisions under Section 76, 77, 78, 78A and 80 of the Finance Act, 1994. Thus the interest & penalty, would apply even in case of bonafide error.

If interest is paid, and later the matter is disposed at some higher judicial forum in favour of the assessee, no interest is paid on the interest payable under sec. 75

Further, the rate of interest proposed to be enhanced does not make any differentiation between the real defaulter, i.e. the one who has collected the Service Tax, but has not deposited to government and the other one who has not collected service tax from his clients due to interpretational issues / recipient of services not paid service tax under reverse charge due to interpretational issue.

In view of above the proposed amendment should be rolled back in toto.

Alternatively the necessary provision should be made to the effect that higher rate of interest should be applicable only to the cases governed by Section 73A of Finance Act 1994, which is related to first category i.e. service tax collected but not deposited to government.

6

CENVAT credit not allowed for input services used in the construction / expansion of the factory by the manufacturers

Cenvat credit of all services used in construction or setting up of factory / factory building should be allowed and should be taken out of the exclusion list.

There is a contradiction in the definition of input service. On one hand it includes services used in relation to modernization, renovation or repairs of a factory on the other hand all the possible taxable categories in this area have been excluded from scope of “input service”. Factory / Office of service provider is the prime premises for undertaking manufacturing activity / providing services and hence the credit in relation to any construction/ related activity should be allowed.

7

Recovery of duty in respect of Service Tax demand confirmed against an assessee from another person –Sec. 87 (b) of Finance Act, 1994

The law may be modified to the effect that these provisions would be applicable only in cases where the High court or the Supreme Court, as the case may be, has rejected the appeal of the assessee and he has not paid tax dues within the specified time limit. Further, a clear guideline may also be issued to the field formation as regards the process to be followed in such cases. Govt. should also prescribe the procedure to ensure that the tax more than the one due to Govt. from the assesse is not recovered from any other person/ persons under this provision. In case such excess amount is recovered, assesse should have option to get the refund from the Govt. Detail procedure to make such recoveries and payment of the same to government treasury should be specified.

Section 87(b) (i) of Finance Act 1944 empowers the Central Excise Officer to recover any dues payable from one assessee from another person who owes money to the former. In the event of failure to pay the amount, the latter would be considered as an assessee in default. Even before the legal recourse available to the assessee has been exhausted. This could severely hamper the business. If the service provider is providing services to more than one client, the Govt. issues notices for recovery to all such clients and may end up in collecting more amounts than the one due from service provider. Presently Govt. has no mechanism to control such cases.

VI. Other Issues

S.No.

Issue

SIAM Suggestion

Explanation

1

Stay of demand granted by ITAT is maximum 365 days

If the delay is not attributable to assessee, stay can be allowed beyond 365 days until the disposal of appeal.

Even if the delay in disposing of the appeal is not attributable to the assessee, stay is not allowed beyond 365 Days.
Increased tax burden to assessee without disposing of the appeal by ITAT

2

Shortage of members in the Income Tax Appellate Tribunals to hear TP related appeals.

The department has come up already with a separate Commissioner Appeals for Transfer Pricing who has the expertise / training in the subject. Further, in the constitution of DRP also there are CITs who are knowledgeable in Transfer Pricing Regulations.

It is suggested that there should be a separate bench which is constituted of a Member from Transfer Pricing Back Ground and the Other from Corporate Tax Background. This will expedite the case pending before the ITAT where there are TP adjustments as well as corporate tax adjustments.

Section 92 of the Income Tax Act, 1961 was inserted w.e.f 01.04.2002 for computation of Arm’s Length Price in relation to International Transactions. Since then the Transfer Pricing Officers have been making huge adjustments to the Income of the Assessees where there are International Transactions. These additions were earlier challenged before the CIT (A) and now before the DRP/ CIT (A). The next appeal after CIT (A0 / DRP lies before the ITAT.

The cases for these years where the TP Disallowances/ Additions have been upheld by CIT (A)/ DRP are now coming up before the Income Tax Appellate Tribunal (ITAT). At ITAT there are shortages of members who are well-versed with the provisions of Transfer Pricing. Hence there is reluctance in hearing TP related cases and there is a tendency to adjourn the TP cases.

To give a perspective, the TP cases, in respect of only four assessees, pending at ITAT level are 21 and the tax involved is Rs.727 crores.

3

Deemed transaction under Transfer Pricing

In case both parties are within India, they will be taxable in India. Any loss or gain of one party will be the gain or loss of the other party respectively. Thus if there is any tax loss in the hands of one party will be made good in the hands of the other party. In other words, these transactions will be chargeable to Tax in India in the hands of the payer/ payee at prevailing tax rates. Hence there will be no revenue leakage. In case one party is outside India, there is a possibility of two types of transactions, namely supply and buy in relation of goods and in relation to services. Any payments related to services will be made by the Indian entity only after withholding taxes under the DTAA or the rates prescribed under the Income Tax Act. This withholding is made on Gross Amount of Invoice i.e. without claiming expenses. This TDS deducted on gross basis is more than the tax that is normally expected on the net income / profit. Sale/ purchase of goods should be controlled at the time of import through SVB, even in these types of transactions. In other words, goods related valuation should be dealt with only by Customs and should not be questioned again by the authorities of Income Tax, as they both, falling under the same Department of Revenue, take opposite views, subjecting the assessees to avoidable tax disputes.

There is an amendment in the Transfer Pricing laws to include the transactions with third parties within the ambit of the term ‘International Transaction’, irrespective of whether such unrelated person is a resident or a non-resident, if there exists a prior agreement in relation to such transaction between such unrelated person and an AE or the terms of the relevant transaction are determined in substance between such unrelated person and the AE. For Major MNCs where the transactions are under the umbrella of Global Agreements, for the purpose of optimization of costs, this amendment will result in representation of almost the total financials in a different format. Further, this whole exercise will result in increased administrative cost.

4

TDS deduction under different Sections.

Rationalisation of TDS rate needs to be done – one rate for all Nature of payment (excluding Salary and Foreign Payments)

Reduced litigation and unnecessary confusion

Depending upon the Nature of payment various TDS rates are applicable

Application of wrong Section / rate results in, Interest and Penalty along with disallowance of Expenses.

Increased litigation

5

Process of cutting and slitting of steel coils

It is suggested that process of cutting and slitting of steel coils be also considered as amounting to “manufacture”.

In budget 2012, a note has been inserted in chapter 76 to provide that the process of cutting, slitting and printing of aluminium foils shall amount to “manufacture”.

6

Railway Siding”/containerized trains for transportation

It is suggested that “Railway Siding”/containerized trains for transportation should be treated as “infrastructure” and concession/incentives should be provided under:

NIL Custom-duty on imports for above projects.

Weighted deductions (like R&D) in income tax

7

Customs and Excise Benefits for procurement of Scientific and Technical Instruments, Apparatus, Equipments, etc by a Research Institution other than a hospital

To promote R&D, the Government may also consider the following:-

Full exemption from customs duty for imports affected for R&D purposes by Research institutions mentioned under Customs Notification No.24/2007. Presently similar benefit is allowed to Govt. of India funded R&D projects covered under Customs Notification No.50/1996.

Amendment should be made to Rule 6(6) of Cenvat Credit Rules that provisions of Rule 6 will not apply for goods cleared for R&D purpose under excise notification no.16/2007.

Excise Notification No. 16/2007 exempts goods in nature of Scientific and Technical Instruments, Apparatus, Equipments, etc procured by a Research Institution other than a hospital from the whole of excise duty.

Likewise, Customs Notification No.24/2007 exempts exempts goods in nature of Scientific and Technical Instruments, Apparatus, Equipments, etc imported by a Research Institution other than a hospital from the customs duty in excess of 5% and whole of additional duties.

Both these notifications require the institution to be registered with Government of India in the Department of Scientific and Industrial Research as one of the condition to avail the excise and customs benefits.

Suggestions On Goods & Services Tax(GST)

The Ministry of Finance has laid down the roadmap for implementing Goods & Services Tax (GST) from April 1, 2010 and the Empowered Group of State Finance Ministers on Value-Added Tax (VAT) has accepted the report of the Joint Working Group which suggests a dual GST structure (a central GST and a state GST). However, the draft GST paper is still not available for the industry to give comments.

The auto industry looks forward to introduction of GST. However, based on whatever inputs we got, there are several concerns of the industry which have been mentioned below:

Taxes to be covered/ subsumed

All kind of domestic indirect taxes should be subsumed in the proposed GST, as suggested by Kelkar Committee. This should include Road Tax/Motor Vehicle Tax also.

After introduction of GST, no additional tax should be introduced/ levied. A provision be made in the law that no new levy or tax be introduced.

Any change, if required, in future (for specific needs like calamity, education, infrastructure, etc.) should be done through modifying the rate of taxation under the GST regime and not through any additional levy/tax/cess, etc.

Bring in used vehicle trade under GST framework with a token levy to make used vehicle trade more organized.

1% GST rate will provide substantial annual revenue to the exchequer.

Tax Rates

The tax rate on inputs and output should be fixed considering the pattern of input purchase and output sales which varies considerably. This has implications for the input tax credit. While vehicle manufacturing takes place in a few states with supply to other states (local sales account for less than 10% of total domestic sales), majority of components (around 70% - 80%) are procured from vendors within the state. If tax rate of components/inputs is more than the tax rate at the time of supply of complete vehicles (Completely Built Units), then refund would arise. Hence, to avoid that, it is suggested that

Uniform rate of tax should be charged on complete vehicles (whether by way of sale or by way of transfer) and inputs, against which input credit should be allowed.

Tax paid on complete vehicles on movement from factory should be made available as input credit to the vehicle dealers.

Manufacturers could give state-wise break-up at periodically to respective state governments who may settle it through appropriate clearing house mechanism.

Considering the current level of taxation, a suitable tax rate may be adopted. Tax rates should be uniform across states and there should be one authority to which payment would be made by way of one challan.

Tax Base & Levy

Goods and services should be classified on the basis of HSN and GATTS (at both central and state level).

A common base should be adopted for taxation of both Central and State GST. Under the present taxation system, interstate sales tax and local sales tax is levied on excise duty in respect of the manufactured goods resulting in cascading of taxes.

In case of non-sale, where transaction value of goods or services is not determinable and when GST is charged, a simple mechanism of valuation could be adopted on the basis of cost.

Under GST, it is suggested that the basis of tax credit should be on ‘Cost to Business’, i.e. any tax which is paid and forms cost to business should be allowed as tax credit, both at the Central & State level.

The document based credit should also be dispensed with and could be substituted by appropriate certification by independent Chartered Accountant (or the Appointed Company Auditors). The same could be subject to appropriate audits by trained government officers and could be IT enabled.

Diesel and motor spirit should be brought under GST with input tax credit and mechanism to avail the same. VAT on diesel and motor spirit constitutes a significant element of cost for the transport industry. It is suggested that total chain of input credit should remain unbroken and hence, all inputs should be treated equally for the purpose of allowing input credit.

Others

In the proposed GST system, it is not known whether stock transfer would remain exempted from tax (at present, sales tax is not levied on Stock Transfer) or would be made taxable in the importing state; the industry needs to understand the treatment of stock transfers for the purpose of input tax credit.

There should be no distinction between input and capital goods. Presently, definition of Capital Goods under Central excise law and state VAT is not uniform. Under State VAT, definition of capital goods and also the rate of taxation vary from state to state. As regards periodicity of taking credit, excise and VAT laws differ.

In respect of existing exemptions having sunset clause, appropriate transitional provisions should be introduced to ensure continuity of existing benefits. A clarification is needed on how the existing sales tax benefit schemes e.g. loan, deferral would be affected.

The State Goods and Services Tax Act, State GST Act should be a common Act operated/implemented by all the states and Union Territories (similar to present Central Sales Tax Act) covering transactions related to goods, services and exports.

Concept of ‘Tax Invoice’ should be continued for availing State GST credit.

To ensure viability of EOU under severe competition, timely refund of tax is needed. Effective refund system should be in place for smooth operations of EOUs. Presently, EOUs are eligible to get refund of CST on interstate purchase of inputs used in the production of export goods and local VAT content of the export product is allowed to be deducted against the DTA Sales and the balance, if any, is allowed as refund.

Under a dual GST structure (a Central GST and a State GST), there could be a situation where the Input Tax credits which remain unutilized would be refunded to the assesses. Since the cross utilization of credits between the Central GST and State GST are not permitted, there could be a situation of payment on the one hand and a refund situation on the other. In order to avoid this situation cross utilisation of input tax credits should be allowed.

Procedural changes should be notified in advance. The industry should be given 6 months lead time before introduction of GST.

State specific incentives should be protected under GST.

Note On Modernization of Vehicel Fleet

1. Background

With a view to combating deteriorating air quality, stringent environmental regulations are being mooted. The automobile industry in India has been meeting these challenges. In recent years, the industry has made significant investment to produce safer and increasingly environment friendly vehicles.

The Bharat stage-1 norms for vehicles were introduced in India in April 2000. These norms were then progressively tightened to BS-2, BS-3, and today four wheelers manufactured since the year 2010 in major cities meet Bharat Stage-4 emission norms, which are more than 50 to 80 percent cleaner than the vehicles that were produced before April 2000.

In order to improve the environmental performance of new vehicles further government has plans to introduce BS-5 emission norms in 2020 and BS-6 in 2024 onwards. This policy lays the foundation of control of emissions from vehicles sold in the country.

However, whilst the new vehicles are cleaner and meeting stringent emission requirements and a continuous plan is being evolved by the government of India to further improve the emission performance of these newly manufactured vehicle, the benefits are not getting reflected in the ambient air quality due to the presence of a large number of old and ill maintained polluting vehicles, which continue to ply on the roads, in the absence of an efficient scrappage/fleet modernisation policy in the country.

2. Need for Fleet Modernisation in India

The Automotive industry in India over the years has become instrumental in the growth of R&D in the country through localization and indigenization of technology over the past few decades. Several players have undertaken acquisitions and forged alliances with multinational firms to gain technical know–how and fast–track their progress on the technology roadmap.

However, at present, India does not have a robust national policy on retirement of vehicles or end-of-life of vehicles. Hence, it is important to capitalise on the developments that the industry has catalysed in the country, over the last two decades. Vehicle users in India tend to continue to use their vehicles, well beyond the expected life of the product. Such old vehicles have:

Higher emissions

Lower fuel efficiencies

Lower safety standards

which will address all the above challenges and also improve the image of the in use vehicles on our roads. Additionally, fleet modernization of government departments can also be included.

3. Approach for Scrapping of vehicles

World over vehicle scrappage and fleet modernisation is regulated through an end of life policy, which is implemented through a robust Inspection and Certification system. Notwithstanding a robust I & C system in countries like Europe, etc. even these countries had to resort to schemes like Cash for Clunkers for weeding out old and polluting vehicles and replacing them with new environment friendly ones.

In India I & C system is now in the process of being set-up. Having started late, the Indian I and C programme can be expected to become operational only after 4 to 5 years. Secondly, I & C for private vehicles is yet to be conceptualised in India, as the present programme is limited to Commercial Vehicles. All these reasons point to an urgent need for an alternative initiative to cleanse the Indian roads of old and polluting unsafe vehicles, till the time the I & C mechanism takes root in the country.

SIAM would suggest that in order to mitigate immediate air quality problems and decreasing the menace of road accidents, rather than a mandation, a limited-time incentive scheme for retirement of old vehicles is required.

A cut-off point of 15 years vintage is considered for all vehicles, for replacement under the fleet modernisation programme. Similar schemes have been successfully implemented in some of the countries, such as, the USA, Canada, the UK and Italy by providing fiscal incentives and concessions for replacement through a single window fleet modernisation programme. The accelerated fleet modernisation programme in the USA allowed owners to voluntarily retire their older vehicles emitting higher pollution. The primary objective of fleet modernisation programme was to reduce pollution by accelerating normal fleet turnover so that new, cleaner vehicles can be put into use sooner than would occur in the normal course. The impact of incentive schemes in the countries had been encouraging.

This concept was also recommended in India’s Auto Fuel Policy released in October 2003 (page 6 point 24), which is a Union Cabinet approved policy document and still guides India’s automotive emission control and fuel policy, but this particular recommendation has still not been implemented. The policy states: “... Schemes combined with incentives would be developed for the replacement of old polluting vehicles.” It would help in removing older, potentially polluting and unsafe vehicles from the road. The replacement of these older vehicles would also have an additional favourable impact on the economy.
This programme would generate additional demand for new vehicles and make the scheme potentially revenue positive from the government’s point of view.

Also, the country would benefit by way of reduction in expenditure on account of fuel saving by retiring old vehicles and replacing them with more new ones, which are more fuel efficient. Most importantly, the reduction in pollution would lead to substantial health benefits and the resultant reduction in cost of medical treatment, reduction in premature deaths, reduction in man days lost on account of illness and so on.

Therefore in India, this scheme will have benefits of reducing pollution, reducing fuel consumption and improving safety (reducing fatalities from 130,000 people presently killed annually in road traffic crashes).

The fleet modernisation programme should encompass all vehicles, both private and commercial use with a cut-off point of pre 2000 vintage.

Keeping in mind the socio-economic and political implications that the scheme may have, it should focus on incentives rather than simple mandates. In the present Indian scenario, it seems more feasible to encourage people rather than to force them to replace their old vehicles with new ones.

The proposed scheme requires support from both the State Government and the Central Government. The Governments at both levels would need to come together to make this programme successful by providing fiscal incentives for fleet modernisation.

4. Implementation

For successful implementation of the scheme, following elements are critical:

Encouragement to the last owner to scrap the old vehicle

Provision of environment friendly scrapping of the vehicle by notified agencies eg: MSTC, in the presence of RTO officers.

RTO to de-register the vehicle and issue a Scrappage Certificate to the registered owner.

Scrappage Certificate to be treated as a tradeable certificate for availing of tax concession on purchase of new vehicle

These elements are explained in more detail in the scheme as detailed in the following sections.

To encourage old vehicle owners, government should incentivise by way of waivers:

50% waiver of Excise duty

50% waiver of Sales tax

50% of Road tax

This will be a revenue positive proposition since the waivers are being given only on incremental sale of vehicle, which will be possible only if the old vehicle is scrapped. In order to initiate this scheme, the Road Transport Authorities should authorise nodal agencies eg: MSTC in setting up Scrap Yards across the country.

To avail incentives, at the time of delivery of the new vehicle, the old vehicle has to be necessarily scrapped. A suitable mechanism has to be evolved to ensure destruction of the old (exchanged) vehicle. The Certificate of Destruction (CoD) will be issued in the name of the registered owner by the State Road Transport Authority.

5. Replacement Scheme across India

Given the profile of vehicle population in India, the suggested scheme would offer an effective solution to the problem of vehicular pollution faced by India. This scheme will be valid and operational across India.

6. Steps for Availing the Scheme

All vehicles manufactured on or before April 2000, the year Bharat Stage-1 was introduced, would qualify under the Project Modern Fleet vehicle replacement scheme from 1st April 2015.

Step-1: The last owner of the old vehicle decides to avail the benefit of the scheme ‘Fleet Modernisation’, only for purchasing a vehicle of same category.

Step-2: The vehicle owner visits the nearest vehicle dealer for purchasing a new vehicle, with all necessary documents of the old vehicle. At the time of availing the scheme, it should be ensured that the vehicle has all valid documents, such as Road Tax receipts, Insurance, etc.

Step-3: The customer hands over the old vehicle to the dealer who further sends it to the scrap yard for scrappage. The dealer will inform the customer that Certificate of Destruction (CoD) could be collected after a few days – may be a week – once the vehicle is completely scrapped.

Step-4: The Dealers are expected to send all the collected vehicles to the authorised scrap yards, eg: MSTC for scrapping of the vehicles in an environmentally safe process under due supervision of the regional transport authority. The revenue generated by selling the old vehicle to the scrapyard, eg: MSTC will be distributed among the two parties at the ratio of – Dealer (15%) and Customer (85%).

Step-5: The Regional Transport Authority issues a valid Certificate of Destruction (CoD) and will de-register the scrapped vehicle.

Step-6: The CoD should necessarily contain all the information given in the registration certificate, such as date of manufacture of scrapped vehicle, model, engine capacity, fuel used, gross vehicle weight (GVW), etc.

Step-7: Once the customer received the CoD, he or she is entitled to incentives against purchase of a new vehicle, of the same category as that of the old one. The invoice for the new vehicle will reflect a value equivalent to 50% of the Road tax and Sales tax and deduct additional value of 50% of the Excise duty for the vehicle. However, the total rebate of Sales tax and Excise duty together may not exceed a pre-determined value. This CoD would be tradeable within the State/Union Territory where the scrappage took place.

Step-8: The vehicle dealer receives a copy of the CoD. The dealer could be authorised to give any new customer a new vehicle, of the same category registered in that State, with the agreed discount/incentive. The dealer will pay the rebated Sales Tax amount on the basis of the CoD. Similarly, the manufacturers will adjust the Excise Duty rebate amount in their current PLA/ Credit Account against the CoD, as per the present practice of excise duty refund for Taxis.

Step-9: The CoD is to be treated as a tradeable instrument having jurisdiction within the state. i.e. if a vehicle is scrapped in Mumbai, the benefits of the scrap certificate should be available during purchase of a vehicle anywhere within the state of Maharashtra. The certificate should be made tradeable also within the state.

7. Preliminary estimation of benefits

Revenue

Assuming that all vehicles sold under the programme are replacements and as such additional sales, over and above the normal sale, there will be a revenue positive impact.

It is estimated that the above scheme would initiate a replacement of about 24.2 million Private vehicles and 3.2 million Commercial Vehicles, in the above eight States. Similarly, it can be extended across the country. Hence, from the above table, having data for the eight states, we can easily estimate that the revenue generation for the government, across the country, would be significantly higher than the amount generated in eight states.

Emission Benefits

Analysis shows that 60-80% of pollutants generated by on-road vehicles are from older vehicles (>10 years of age), which constitute just 20-30% of the total vehicle population. Emission benefits by replacement of Commercial vehicles older than 15 years and private vehicles more than 10 years old in India would result in about 80- 90% reduction engine out emissions from the new fleet. The reduction from each pollutant for the given fleet replaced is indicated below. Therefore, by retiring older vehicles, the impact on air quality would be significant.

Fuel Savings

Further, older vehicles consume more fuel as compared to newer vehicles with modern technology. It is estimated that that the amount of petrol consumed nationally could reduce by about 5%, if older (>10-15 years of age) vehicles are replaced by newer vehicles.

It is estimated that if more than 15 year old Two-Wheelers are replaced with new Two Wheelers, Passenger Cars and Commercial Vehicles in these Seven States, which would obviously have better Fuel efficiency, then the total fuel saving would be in the tune of 7,862 million litres of saving per annum. This translates to about Rs 490,000 Crores of saving for the country.

Road Maintenance

Fleet Modernization programme could contribute to reduction of annual Operation & Maintenance costs by 8-10% and periodic maintenance costs by 20-25%. It is estimated that approximately 8-10% of annual O&M costs and 20-25% of periodic maintenance costs of highways can be attributed to vehicular related factors, such as overloading, poorly maintained vehicles, etc. Old and poorly maintained vehicles contribute a proportion of these costs.

Image Building

It is estimated that currently less than 1% of vehicle population is retired annually in India, but none of these vehicles is officially de-registered. A majority (70-80%) of these vehicles is more than 15 years of age and is scrapped on account of accident, old age or government norms.

Existence of such old fleet affects the image of the country, which is the world’s second largest two wheeler and bus manufacturing country, seventh largest commercial vehicle manufacturer and sixth largest passenger vehicle manufacturer.

Other Approaches for supplementing the Modern Fleet Scheme

In order to discourage people from running old polluting vehicles, the rate of road tax and rate of premium on motor vehicle insurance could be increased progressively with the age of the vehicle.

The manufacturers of commercial vehicles, inter alia, manufacture chassis for motor vehicles and get bodies for goods or passenger transport application built thereon from the outside independent body builders. The chassis are classifiable under Chapter Heading 8706 – `Chassis fitted with engines, for the motor vehicles of heading 8701 to 8705’. For this purpose, the chassis are sent to the body builders on payment of duty. The body builders build / fabricate body on the chassis to get motor vehicles falling under Chapter Heading 8702, 8703 and 8704. Such activity of building body amounts to manufacture of a motor vehicle, in terms of Chapter Note 5 to Chapter 87. Thus as per the Central Excise Tariff, Chassis is a different article and it gets converted to motor vehicle on building a body thereon or fabrication or mounting or fitting of structures or equipments thereon.

There are two entries in exemption Notification No. 6/2006-CE dated 1.3.2006 viz., Sr. No. 39 & 41, both of which are reproduced in the Annexure attached .for ease of reference. The said entries have been retained after 01.04.2011 and are in fact continued by Budget 2012 vide identical entries no. 276 & 288 in Notification No. 12/ 2012. The body builders do not avail the above exemption in respect of chassis supplied by chassis manufacturers. Therefore, the body builders avail credit of excise duty paid on chassis and utilize such credit to pay duty on value of fully built motor vehicle which obviously includes the value of chassis. Chassis is thus direct input in the manufacture of motor vehicle.

The definition of “input” inserted w.e.f. 1.4.2011 in Rule 2(k) of the Cenvat Credit Rules, 2004 excludes “motor vehicles”. Kindly refer clause (D) in the definition of input. The expression “motor vehicles” has not been defined in the Cenvat Credit Rules, 2004.

If a view is taken that chassis is not “motor vehicle”, then chassis would not be excluded from the purview of “inputs” and consequently, chassis would be eligible for Cenvat credit to body builders engaged in the manufacture of motor vehicle. In such a scenario, there would not be any difficulty in availing credit. However, if a view is taken that chassis is “motor vehicle”, then a literal reading of the definition of “inputs” would lead one to conclude that chassis has been excluded from the purview of “inputs” and consequently, chassis is not eligible for Cenvat credit to body builders engaged in the manufacture of motor vehicle. This will have serious implications for automobile industry.

In our view, since chassis is a direct input used in the manufacture of motor vehicle, there is no doubt that Cenvat credit on chassis is available. However, out of abundant precaution & to put such a controversy beyond doubt, we are requesting for suitable clarification/amendment. This request was also made by us in the `Post Budget Memorandum for 2011’ and the `Pre Budget Memorandum for 2012’.

We submit that the Cenvat credit on chassis cannot be denied for following reasons:

(a) A look at the definition as a whole would show that the scope of “input” depends upon functional use. For illustration, input means goods used in the factory or goods used for providing any output service. The functional utility test has been applied by the Apex Court in number of cases. Hence, if goods are used as motor vehicle, then it would be disqualified as input. However, if the goods are not used as motor vehicle but as part or component in the further manufacture, then it cannot be said the goods have been functionally used as motor vehicle. In other words, where chassis is used in the manufacture of motor vehicle, then it would be qualified as input since it satisfies the functional utility test on being “input”. Further, chassis is a direct input in the manufacture of motor vehicle by the body builder. Moreover, the body builders discharge their duty liability on the value including value of the chassis.

(b) The above also follows from clause (C) of Rule 2(k) which excludes “capital goods” & such exclusion is not applicable when the “capital goods” are used as parts or components in the manufacture of final product.

(c) In the Central Excise Tariff, Chapter Headings 8702, 8703 & 8704 specifically refer to motor vehicle. Chapter Heading 8706 refers to chassis fitted with engines for the motor vehicle. Thus, a clear distinction has been made therein between the motor vehicles and chassis. Similarly, Chapter Note No. (5) to Chapter 87 also provides for construing body building of `chassis falling under Chapter Heading 8706’ as amounting to manufacture of motor vehicle. This also distinguishes motor vehicles from chassis.

(d) In the recent Union Budget, under Rule 2(a) (A) (viii) and (B) of the Cenvat Credit Rules, 2004 certain motor vehicles and their chassis have been specifically referred to in the definition of `Capital Goods’. If motor vehicles included chassis, there was no requirement for the provisions to mention `chassis’ in this definition. Thus, wherever legislature intended to refer to the chassis, it has been specifically mentioned. There is no need to import the words which do not exist in the definition of `input’.

(e) Prior to 1.4.2011, there was no ambiguity and credit was available to a body builder if it so desired. The ambiguity currently faced is result of change in definition of “inputs” w.e.f. 1.4.2011. The change in the definition of “inputs” w.e.f. 1.4.2011 should not result in change in legal position since there is no apparent reason for change in the stand of the Government as far as body building industry is concerned. In fact, the entry nos. 39 & 41 in Notification No. 6/2006-CE dated 1.3.2006 as existing prior to 1.4.2011 contemplate situations where credit on chassis is not availed by the body builder while arriving at the value of motor vehicle. The above entries have been retained after 1.4.2011 & are in fact continued by Budget 2012 vide identical entries no. 276 & 288 in Notification No. 12/2012-CE dated 17.3.2012. The existence of entries in the form they existed prior to 1.4.2011, for period after 1.4.2011, shows that credit on chassis is available in law. It is therefore, submitted that there being no change in stand w.e.f. 1.4.2011, there should not be change in legal impact as well.

(f) Guided by the definition of `input’ as it existed prior to 01.04.2011, maybe, the amendment w.e.f. 1.4.2011 was to restrict Cenvat credit on motor vehicles as “inputs” to the service sector & not to disturb the manufacturing sector. Inadvertently the manufacturing sector is being adversely affected.

In view of the above, we request for a suitable clarification / amendment in this regard for future as well as past i.e. period starting from 01.04.2011.

Excise Duty On Sales Tax/ Vat Benefit given By State Governments

Background

(a) Excise duty is payable on transaction value of sale of vehicles i.e. price charged by seller from buyer. Sales tax and other taxes are to be deducted from above Transaction Value if such tax is actually paid/ payable on such goods.

(b) As a measure to promote specified areas and industries, various State Governments grant benefits to industries which are linked to the sales tax payable by these industries. Such benefits could be by way of :-

Exemption from payment of sales tax for a particular period.

Deferment of payment of sales tax for a particular period.

Grant of incentive equivalent to sales tax payable by the units.

(c) The Central Board of Excise and Customs examined the issue of exclusion of these amounts for computation of the value of goods on which excise duty is paid and addressed the same in Board Circular No.378/11/98-CX dated 12.03.1998. The Board in its said circular stated that only in situation (i) above, the sales tax is not deductible as no sales tax is payable by the assessee in accordance with the law. However for situation (ii) and (iii) above, the Board clarified that the amount of sales tax is deductible for the determination of assessable value of goods for levy of Excise Duty.

(d) The said circular of 12.03.1998 is still applicable even after amendment to Section 4 of the Central Excise Act with effect from 01.07.2000. This is evident from Circular No.679/70/2002-CX dated 04.12.2002 wherein the earlier Board Circular of 12.03.1998 was referred and it was clarified that where deferment of payment of sales tax for a particular period is allowed by the State Government as an incentive, interest on money retained by the assessee for that period cannot be considered as an “additional consideration” for levy of excise duty.

(e) It is also important to note that CBEC issued a Circular No. 671/62/2002-CX dated 09.10.2002 which correctly laid down the principle that only that amount of sales tax will be permissible as deduction under section 4 as is equal to the amount legally permissible under the local sales tax laws to be charged/billed from the customer/buyer. Thus where the local sales tax law entitles the seller to charge a particular amount as sales tax from its buyers, then the same must be allowed as a deduction from the transaction value even if later on the State Government, to incentivize the manufacturer, allows him to retain a part of the sales tax collected by him as a subsidy.

(f) On a broader perspective also, schemes of grant of incentive by the State Governments by way of retention of part or whole of sales tax collected are only methods for extending the benefits as they can be easily managed and accounted for. Alternatively, the State Governments could have collected the entire sales tax amount and thereafter, given back by issuing cheque for the whole or part of it to the same industries as subsidies, grants, etc. However such a methodology can be cumbersome for both the Government as well as the industries. It is for this reason that governments of various states adopt incentive schemes whereby industries are allowed to retain whole or part of the sales tax amount collected by them and the State Governments treat the retention as equivalent to full sales tax being paid by the assessee to the Government. Accordingly, retention of sales tax is the same as receiving grants from the State Government except for the number of steps involved, but the essence, intent and objective remain the same.

(g) Likewise, some State Governments also grant incentive by way of deferment of sales tax for a particular period or allow the assessee to pay a part of the sales tax amount upfront in lieu of deferment of sales tax to be paid after a particular period. There can be a situation where the assessee collects the sales tax from the buyers of its goods but deposits the entire amount to the State Government after a particular period, say 5 years. In such a situation, the Board vide its circular dated 04.12.2002 has already clarified that interest on money retained by the assessee for that period cannot be considered as an “additional consideration” for levy of excise duty. On the other hand, some states like State of Haryana, allow the assesse to pay 50% of the sales tax amount upfront in lieu of deferment of sales tax. Thus in essence the State Government allows the upfront payment of 50% of tax amount in lieu of payment of 100% tax after say 5 years. Thus, it is also in nature of interest which has been held by the CBEC to be not includible in the assessable value for excise duty payment.

the Hon’ble Supreme Court in the case of Super Synotex(India) Ltd. has held that under the present provisions of Section 4 of the Central Excise Act which came into effect from 01.07.2000, a part of the sales tax amount collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, should be added to the assessable value of the product for the payment of excise duty.

A similar judgment has also been subsequently delivered by the Hon’ble Supreme Court in case of CCE v Maruti Suzuki India Limited (Civil appeal No.5183 of 2004)

Issues involved

(a) Thus, till the pronouncement of the above judgments by Hon’ble Supreme Court, the understanding prevailing in the government as clarified by way of CBEC circulars & industry was that a part of the sales tax amount collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, by way of deferment or otherwise, should not be added to the assessable value of the product for the payment of excise duty.

(b) Various manufacturers across the country and operating in different business segments are facing serious problems in light of this judgment of the Hon’ble Supreme Court in as much as the excise department is asking them to pay excise duty and interest on the sales tax incentive amounts granted to them by various State Governments.

Suggestion

It is suggested that suitable legislative amendments be made to solve problem relating to State Government incentives.Substance of amendment can be following:-

(c) The amount of sales tax collected and retained by the manufacturer, as allowed under an incentive scheme launched by the State Government, be considered as equivalent to sales tax actually paid under the excise law and thus should not be added to the assessable value of goods for excise duty calculation. This should be made effective from date of amendment.